Manufacturing faces steel crisis

Trouble in the pipeline: Corus will raise its prices for the third time this year in July

By Tessa Thorniley

12:01AM BST 26 Apr 2004

Britain's manufacturing industries are facing a crisis as steel shortages in Europe and soaring prices caused by surging Chinese demand start to bite.

Steel prices have seen the most sustained burst of inflation for 30 years, doubling in the past 12 months. Scrap metal, iron ore and coke on which steel production depends are also in high demand and have started to show signs of short supply - reflected in alarming price increases.

China, which accounts for a third of global steel demand, produces the bulk of seaborne traded coke around the world and tight export controls in recent years have restricted availability further.

According to trade body UK Steel, Riva, the large Italian steelmaker, and Arcelor, the world's biggest, have been forced to cut output as a result of coke shortages. A report out this week from the Engineering Employers' Federation (EEF) and UK Steel will show UK steel companies - which have quietly prospered as the price has soared - are also starting to feel the pinch.

Last week Corus, Britain's largest producer, warned that the company "could be in a situation where we cannot supply as much steel as we'd like" and said its prices will rise for the third time this year from July. The EEF says the situation is "unlikely to be reversed in the short to medium term", warning that supply shortages will "worsen over the summer".

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Stan Hardy, director of the Cast Metals Federation (CMF), which represents 220 British foundries, said: "Most British manufacturers have received letters from EU steel mills, warning of short supply. Some say they are unable to supply any steel for the rest of the year." He pointed to one Sheffield-based CMF member that lost a £6.5m export deal because it needed 3,000 tonnes of steel to complete the order but could only secure 650 tonnes.

Small companies face the biggest threat as many larger users such as car manufacturers have guaranteed supplies through long-term contracts. Howard Gillard, a director of Leeds-based Warehouse Systems, which makes steel structures to store industrial pallets, was recently told by a supplier in Holland not to expect any steel until October.

Mr Gillard said: "We're a young company and our costs have gone through the roof. Corus, one of our suppliers, has written to us about further price hikes and steel shortages have caused massive disruption to production. With prices going up on a daily basis it's impossible to plan - suppliers are quoting us price lists valid for just 10 days."

Brian Levich, senior steel analyst at Metal Bulletin Research, said short-term spot prices are well ahead of long-term contract prices. "Anyone buying steel in the spot markets is paying an extraordinary price. It comes down to what extent companies can continue to pass on the increases."

The shipping industry is also feeling the squeeze, with steel shortages hitting the supply of freight containers. Last month James Sherwood, president of Sea Containers, which leases the containers, said he had never seen such a shortage in the history of the business. European Commission officials have met to assess whether the rapid rises in raw material prices merit intervention in the market.

Eurofer, the European steel producers' lobby group, is calling for a "monitoring regime" that would require scrap metal merchants to apply for export licences.